How Central Banks Come to Know about your Trades!

Central Banks know your positions: if someone thinks market is totally neutral and there is no bias against any trades that are being placed then here is an occasion in 1987 that you might be aware of. An FX trader from Bankers Trust in New York named Andy Krieger placed a huge bet against the Kiwi (NZD/USD.) Like George Soros bet against the Bank of England, he was aware of the total money supply of New Zealand. It is the presumption that Mr. Kreiger, "sold more Kiwis than the entire money supply of New Zealand." Hysterically, it's been alleged that "New Zealand's Finance minister telephoned Bankers Trust (his employer) to complain and beg for mercy."

Now having said that, do the central banks care about trades that are being placed by retail traders, the answer is 'No.' On the other hand, can the Central Banks take extreme measures to discourage this kind of speculation, 'Yes.' Central Banks can raise the overnight interest rates of their currencies overwhelmingly, say, for 500% while nominally permitting the tradings--which can create an effect of "Reflexivity." 

So, there is huge risk involved in trading against a government. And again, retail traders have nothing to worry about--the notion that someone is always conspiring against your trades is a complete fallacy.

 

[Source: Foreign Exchange, A Practical Guide to the FX Markets]

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Comment by Mariano on September 4, 2011 at 7:41pm

Very well said Peter!

I think we just have to believe in the term 'Dirty Float' that is being used in the currency market by recognizing that the rates are nominally market determined-exchange rates that are not 'Free-Floating' and are not immune from external (sovereign or governmental) interference time to time. So, along your conclusion, I also would like to say that the best way is to follow the market waves, use the technicals and ride on those waves..........

Comment by Joynal Abedin on September 5, 2011 at 7:26am
I love to follow the trend. "I know very well "Trend is my Friend". If He does go in favor of me, I just close the trade.
Comment by 2ndSkiesForex on September 5, 2011 at 9:45am
First off, its the central banks job to affect extreme volatility, price speculation, etc. in the markets.  Its their job to protect the value of the currency in the best interests of the country. They state their goals/focus on their websites so it should be no surprise they are involved in the currency markets.

If someone is placing a large enough trade that its larger than the money supply of say Kiwis, you better believe the central bank is going to get involved as it could create a massive price instability for their entire country.  So why is this surprising or deceptive to anyone?

But here is the real deal about trading against a central bank.  In the short term, its a bad idea but all they end up doing is creating an artificial price action environment.  But in reality, when has a central bank been right about anything as of late?  BOJ intervened several times in the last decade and failed in its attempts.  The SNB did so several times and failed in virtually every attempt.   Take a look at the CHF and JPY.  Are they weaker after their interventions?  No, they are much stronger.

Central banks have essentially been wrong in almost every instance and in reality, long term, id rather be going against them then with them.  Short term, sure, i'll get out of their way or maybe even trade their intervention.  But long term, they've all been wrong virtually for the last 30years.

Kind Regards,
Chris Capre
2ndskiesforex.com
Comment by Mariano on September 5, 2011 at 11:02am
I agree with you Chris. The 'Dirty Float' in the currency market fades off overtime due to the investor's speculative sentiment. I checked your video which explains pretty clearly how one currency intervention could effect another denominated currency at the same time. One thing I have to say that intervention trades are the best trades in order to make quick and sizable profit in the currency market as long as we are aware of the directional bias.
Comment by 2ndSkiesForex on September 5, 2011 at 11:08am
Couldn't agree any further - well said.

Chris Capre

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